Higher Ed Bill Like Coal in the Stockings of Student Loan Borrowers

There are many provisions in the 500-page-plus Higher Ed Reauthorization bill that are expected to increase college costs and student loan debt burdens by essentially reducing the government’s role in college loan programs as well as government oversight of school policies, especially for-profit institutions, while simultaneously increasing federal loan limits. On the flip side, there are also some items that would simplify the college loan process and provide students and families with additional information about a school’s enrollment and the average debt and salaries of graduates five and 10 years after graduation.

Here are several key provisions for federal student loan programs that would impact students, based on analysis of the bill by financial aid expert Mark Kantrowitz, the American Council on Education and Jessica Thompson, policy and research director at the Institute for College Access and Success.

• Creation of a new federal ONE loan, which replaces many existing federal college loans.
• Elimination of government-subsidized loans for undergraduates. Interest would accrue while the student is attending school, which is not the case currently. The result is more debt to pay back. Also eliminated: the Federal Perkins Loan and Federal Grad PLUS Loan, but a $300 bonus is available for Pell Grant recipients taking at least 30 credit hours through the first two semesters.
• Repeal of the public service loan forgiveness program, which is available to graduates employed in a qualifying public service jobs (in government or certain nonprofits) so long as they make 120 on-time monthly payments on their loan.  
• Consolidation of repayment options from several to just two — a standard 10-year repayment option and an income-based repayment (IBR) option, which is more restrictive than current options.
• The new IBR options requires payment of 15% of discretionary income until the loan is repaid in full, including interest. Current repayment plans tied to income — Income-Based Repayment (IBR), Income-Contingent Repayment (ICR) and Pay as You Earn (PAYE and REPAYE) cap interest payments at either 10% or 15% and forgive the loan after 20 or 25 years.
• Elimination of the Teacher Education Assistance for College and Higher Education (TEACH) Grant Program, which provides grants of up to $4,000 per year to students who agree to teach for four years at an elementary school, secondary school or educational service agency that serves students from low-income families.
• Loss of federal work-study eligibility for graduate students
• A cap on federal loans for graduate students at $28,500 annually, where no cap currently exists. The limit could drive grad students into the private student loan market, which generally carries higher rates than the federal loan market.
• Elimination of the Cohort Default Rate (CDR), which measures the share of federal student loan borrowers who default within a specified period of time at individual colleges. If a college has high CDR, it may lose future eligibility for federal grants and loans. 

The bill also does away with policies designed to protect students and their families against potential fraud by for-profit colleges, by:

• Eliminating the gainful employment provision, which requires that vocational programs at for-profit colleges and nondegree programs at community colleges set minimum thresholds for the debt-to-income ratios of graduates or risk losing access to all federal financial aid for a period of time
• Repealing “borrower defense,” which allows loan forgiveness for students who are victims of fraud by an institution. Students who were defrauded by Corinthian Colleges have used this defense, but many are still waiting for the forgiveness they are expected.
• Eliminating the the 90/10 rule for for-profit colleges. The rule bars for-profit colleges from receiving more than 90% of their revenues from Department of Education Title IV federal student aid, which includes student loans and grants.

(Related: CFPB Seeks $183M From Lender Over Corinthian College Loan Scheme)

Altogether these changes “make college more expensive and debt that’s harder to pay off — just the opposite direction that everybody needs,” says Thompson of the Institute for College Access and Success.

The American Council on Education compared the costs of a federal loan charging 4.45% over 10 years for undergraduate and graduate students under the current subsidized federal loan program and the proposed unsubsidized equivalent using average loan amounts for each academic year according to the DOE’s 2012 student aid study. It found that over four years an undergrad borrowing just over $16,100 would pay about $6,300 in interest under the new proposed program, or about $2,000 more in interest than under the current subsidized plan.

Not all the provisions of the Higher Ed Reauthorization bill would negatively impact students and their families. The bill also includes positive items such as the requirement that the Department of Education develop a mobile FAFSA (Free Application for Federal Student Aid) tool and report on efforts to simplify the FAFSA. In addition, the FAFSA would no longer count 529 plan savings as income from a parent or student — depending on the plan’s owner — for purposes of computing the expected family contribution (EFC) to finance college, which is the basis for qualifying for financial aid.

Also, origination fees on student loans are eliminated, higher caps are set for undergraduate loans along with the authority of institutions to limit borrowing, which could be construed as positive or negative, depending on the situation. Schools would be required to provide students annual counseling or disclosure on the terms and condition of the grant and/or loan, including an explanation of how a student can budget for typical educational expenses.

“While the proposal recognizes the need to simplify programs, and takes steps to improve loan counseling and data transparency, these changes are overshadowed by massive cuts to the federal government’s current investment in student aid and college accountability,” says Debbie Cochrane, vice president for the Institute for College Access and Success, in a statement. 

— Related on ThinkAdvisor:

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• DeVos Sued Over Plans to End Protections for Student Borrowers
• Complaints by Student Loan Borrowers Yield Millions in Relief: CFPB
• A Portrait of the Student Loan Borrower: Older, Deeper in Debt, More Likely Delinquent